The foreign exchange markets are often described as a ‘roller coaster’, but yesterday’s move in the euro had more in common with a rocket-propelled bungee jump. The common currency initially popped higher after the European Central Bank announced that it would reduce monthly asset purchases by a quarter – but then dropped by the most since the Brexit referendum when Mario Draghi extended bond buying into December next year.
Going into the announcement, traders were largely positioned for a binary outcome – either a six-month continuation of the existing programme, or a six-month “taper” in purchases. Instead, once the knee-jerk reaction to the headline print had passed, the central bank’s relatively open-ended commitment to providing lower amounts of stimulus for longer was viewed as generally dilutive for the currency. Core bond yields surged and then plunged as market participants parsed the details, with many only gradually realizing that nine tranches of 60 billion euros is more stimulative than six tranches of 80.
In the minutes before the post-announcement news conference began, the euro jumped by more than a hundred basis points, before falling almost two percent. Despite our reputations, perhaps foreign exchange traders don’t have the strongest mathematical skills.
Despite the sell-off, the euro remains almost a cent stronger than the low established in November – potentially suggesting that market participants are becoming increasingly skeptical of the Trumpflation dollar rally’s staying power. Count us among them. Markets have seemingly priced in most of the positive aspects of a Trump presidency, turning the dollar into a steamroller that has crushed all other currencies in its path over the past month, but there has been little recognition that major risks remain.
Many have extrapolated greenback strength and corresponding weakness in the euro forward, with several major banks putting forecasts below parity. We can’t rule it out, but the common currency has read its own obituary too many times over the years to make this a prudent bet. As always, we would caution corporate hedgers against relying on these forecasts – due to their very nature, currency markets move in a unpredictable, contrarian manner.
Here in Canada, the currency is receiving solid inflows because the Bank of Canada put the first woman on the $10 note – the addition of Viola Davis to the bill sparked strong inflows over the trading session, pushing the exchange rate upward through several resistance levels to change hands at levels not seen since mid-October.
Or, a jump in oil prices may have something to do with it – front month barrels traded up more than two percent during overnight trading, after the Organization of Petroleum Exporting Countries magnanimously invited 14 non-member countries to a meeting in Vienna on Saturday. With many core cartel suppliers unwilling to commit to actual cuts, and crude markets remaining incredibly oversupplied, the organization is hoping that a broader consensus can be forged among stakeholders that have traditionally shuffled around on the margins.
Given the stakes, the likelihood of an agreement seems high, and speculative money will undoubtedly flow into the long side of the market over the session – but the futures curve remains depressed and volatility measures are falling, suggesting that traders have little faith in the organization’s ability to shift longer-term fundamentals.
It may be time for Albertans, Texans, and North Dakotans to print the fourth round of bumper stickers – “Lord, please give me another oil boom. I promise not to blow it this time!”
Have a great weekend.
For lighter entertainments than the Westworld finale, you could do worse than the following:
International Monetary Fund: Globalization Resets
Vanity Fair: Canada’s Maple Syrup OPEC
Bloomberg: There’s No Fairy Tale Ending to G-20’s Worst Export Slump
Follow the Money: The Case For Naming Taiwan a Manipulator
Bloomberg: Why China Can’t Stop Capital Outflows
Project Syndicate: Can Trump Save the Euro?
CNBC: Can Algos Trade Trump’s Tweets? Absolutely. Maybe.
Bloomberg: Mexico and China Are Very Different
International Monetary Fund: Global House Prices: Time to Worry Again?
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